Friday, December 21, 2007

Car pollution: the wrong way, but in the right direction

The US Congress approved stricter standards for fuel efficiency in cars, the so-called CAFE standards, and President Bush signed this law. The European Union is also working towards stricter requirements. So there seems to be broad agreement that cars should become more efficient. But is this the best way to reach this goal?

Mandated higher fuel efficiency standards have one main consequence: the cost of cars should increase. In economic terms and for households, this means the fix cost of owning a car increases. As cars are more efficient, the marginal cost of driving then decreases: same cost of gas, more mileage out of a gallon. Thus, conditional on owning a car, people will be driving more. But will there be fewer cars on the road? Allow me to doubt that in the US, where it seems to be a God-given right and duty to own a car. And if a multi-car family decides to downsize, the remaining car(s) will be driven more. Things may be a bit different in Europe, where car loans are not as widespread to pay for the fix cost and alternatives to driving are well developed, even in rural areas.

All in all, I seriously doubt that this will reduce pollution and I am sure this will increase traffic. Just what we need. So what is the (better) solution? You guessed it, tax gas. This increases the marginal cost of driving, internalizes the relevant externalities, increases, whether you like it or not, the revenue of governments, and pushes manufacturers to provide more fuel efficient vehicles as they are demanded by drivers. No need for complex regulation and coercion to achieve those higher standards. All the incentives are right.


Anonymous said...

Also known as the Jevons Paradox or the Rebound Effect. Wm. Stanley Jevons worried, in 1865, Britain was going to run out of coal, thanks to James Watt's coal fired steam engine being so efficient.

Bruce Webb said...

Well this may be economically logical, but I am not sure it is historically correct.

"Mandated higher fuel efficiency standards have one main consequence: the cost of cars should increase. In economic terms and for households, this means the fix cost of owning a car increases. As cars are more efficient, the marginal cost of driving then decreases: same cost of gas, more mileage out of a gallon. Thus, conditional on owning a car, people will be driving more."

Well did the cost of cars actually increase with the last CAFE standards? Every time Detroit gets a mandate, from seat belts to various fuel efficiency measures to air bags they have insisted that they are cost prohibitive, that people won't use them and will refuse to pay for them. Well over the last three or so decades none of this actually ends up playing out. People will only pay so much for a car, cost increases simply don't flow through transparently, and more often than not car companies ended up introducing those safety features as options starting with their top end models. One year air bags are job killers, next year they are sales points for your luxury models. Not everything goes down the Memory Hole, these people have been crying wolf for a long long time now.

Nor is it all clear that people actually do drive more or less as their marginal cost fluctuates. For most people the gross amount of their driving is set by their commute or other daily chores. Certainly people can try to consolidate trips to the store to SAVE gas or conceivably chose to travel by air for the same reason, but I see no historical reason to believe the effect works the other way, people don't lengthen their commute or choose a longer way to the store or day care just because they can. (I suspect this effect does work with purely recreational vehicles. People in my experience do make decisions on whether to take their power boat out based on fuel costs. Then again a big boat burns through huge amounts of gas per hour.)

Economists tend to work on a theory that suggests that everyone has a calculator in their head that only responds to changes in prices, when in fact things like driving are constrained by many more factors. If you live to drive your Harley or conversely run on such a tight schedule that you don't have time for a drive in the country it is not at all clear that your mileage will automatically offset itself by the exact amount of monetary savings you get from more efficiency. That is more a leap of faith, if you want people to accept it you would need some more empirical backing.

As for the gas tax, it is a very regressive for those people who already minimize their driving to the amount possible. The working poor often enough obsess about whether they have sufficient gas money to get through to payday, and many drive cars that are inefficient to boot. Throwing an extra tax on them to change behavior of people who are better off is not really very equitable.

Your argument really boils down to suggesting that more affluent people will just piss away their gas savings by driving more and so lets just tax everyone. Well sorry not everyone is in the position of just being able to cut back on their mileage, they need to get the kids to school, themselves to work and groceries home.

Like most arguments for consumption taxes a little "Let them eat cake" seems to have slipped in here.

Stevelle said...

In spite of Bruce Webb's great comment above, let me just commend you for a great start on your new blog. You are bringing an interesting perspective to the economics blogging community, and helping more folks begin to understand some of the more subtle complexities of public policy.

Stevelle said...

Bruce, while you make several good points here, I have to take issue with your last point about the regressiveness of gas taxes.

I want to remind you that folks have choices available to them and they have to take responsibility for their decisions.

In general: Driving your kids to school is a choice. Driving to a grocery store is a choice. Driving to work is a choice. Choosing to live close to the services you need or the places you frequent is a choice. Yes, exceptions exist, but there may be specific localized solutions to some of those.

At least for urban/suburban/exurban centers, falling back on the trope of "the poor *have* to live in the stix" is a *direct* result of misplaced incentives and neglecting externalities--such as encouraging driving by subsidizing fuel costs, and subsidized greenfield development and thus urban sprawl. Of course fixing the problems of inefficient compensation and income taxes would make a big difference as well.

Fixing those things in small stages can improve the affordability of higher density living which reduces the need to protect the poor's dependance on oil, and thus the regressive nature of gas taxes.

Another immediate alternative is to compensate for the regressive nature of increased gas taxes by providing offsetting credits for income taxes and increasing support levels for other social services.

Bruce Webb said...

Driving is not a choice if you live in a rural area or even in most suburban areas. The fact that you can live your entire life in NYC without ever getting a driver's license or driving a car simply does not reflect the realities of the people living in 'flyover country'. Have you ever tried to get eight bags of groceries home on a bus?

If wishes were fishes we would all cast nets, but the realities on the ground show that the working class is either priced out of urban areas (Upper West Side) or chased out by crime and failing schools in the neighborhoods they can afford.

I don't want to be quarrelsome but in my view the whole "driving is a choice" is simply another example of urban elitism and largely a product of people who can stroll from their off-campus digs to their office.

In my area and in many others you have a large amount of small towns and cities that originally grew up to support surrounding farm areas but never had the full range of urban services. If you really wanted to shop for anything but everyday necessities it was necessary to travel to the County Seat which might easily be thirty miles or more away. To do real shopping you had to make your way to the City. In my mixed urban/suburban/rural county it is 48 miles from the town of Darrington (originally a logging and mining town) to the courthouse in Everett, it is 75 miles to Seattle. Telling someone in Darrington that their thrice weekly dialysis treatments can reasonably be accomplished by taking the bus is not particularly realistic. Plus this leaves apart those people who actually still live on farms and ranches.

Its not all just failed urban planning. Some part of this is simply organic. Which is to say that framing this as just a matter of "urban/suburban/exurban" simply fails to capture the everyday reality of people living in traditionally rural counties.

Not to pile on too hard but there are additional class interests being neglected here. Can you make a living in the construction trades without a truck? Well no, in most cases you need to bring your own tools to the jobsite. Around here we do get a certain amount of gaz guzzling SUVs and trucks that never get farther than the mall, on the other hand I know a lot of people who drives dozens a miles a day to put gutters and roofs on houses, their trucks are not an option. Plus I know a lot of realtors who range from just making it by to very successful, good luck shuttling your buyers around by bus.

In my entire working career I spent only 2 1/2 years commuting by car, for the other 27 1/2 years I walked to work. It can be done. But just because it can be done doesn't mean that we should enact punishing policy choices based on that pure possibility without taking into account the fact that most people simply don't have that luxury. For the most part the United States isn't Belgium or for that matter NYC, policy solutions here have to take into account distance calculations that simply don't apply in more densely occupied areas.

Stevelle said...

Sorry, this has gotten long but it deserves a careful reply.

Firstly Bruce, please note that my objection was explicitly focused on those who are *not* rural. I excluded them for a reason.

A full third of the US population are *in* metros. That doesn't include a fair number of folks who live on the outskirts.

By contrast, less than 1% of the current population are farmers. Resource extraction industries, which generally have to occur in rural areas, account for a few percent.

As I said, "in general" folks make a decision to live where they do. I am not arguing your point that rural folks have a different experience and gas taxes can create hardship--I pointed out it is possible to offset this.

That "urban elitism" line was inappropriate. "Quarrelsome" is not the right word, "poisoning the well" seems more accurate.

Not that it should matter but my grandparents come from The Palouse. I was born into a household dependent on Welfare and Food Stamps. I put myself through college on many blue collar jobs. I recently lived in a logging town for over a decade (until May this year). And I am not an academic and did not study economics.

Third, RE: your examples:

Your dialisys-from-Darrington argument is a bit of a strawman because statistically few folks need dialysis and the larger problem for nearly all of them is going to be affording the dialysis itself. And even then the concern may be misplaced: isn't that functionally a medical care cost, and shouldn't it be addressed as such?

There are ways we can cover the special cases, as I said before. The existance of an easily addressed special case doesn't invalidate the general principle. It is important to explore them, however.

For your construction workers and real estate agents, there are legitimate ways to charge the fair costs of doing business (including travel to the work site) to the business that can and should be passed along to their customers. I have BTDT and the IRS approved it.

Both of these are brilliant examples of externalities being avoided by home buyers and should be the role of the free market to take care of. And if all competitors in that marketplace have to pay the tax, that is exactly what would happen.

"for those people who already minimize their driving to the amount possible"

My greater point was that this group is actually quite small, and there are other ways to address regressivity. And taking this in small steps can help us do it right.

Again, for those near urban areas in particular, when you stop ignoring externalities it is seems that "punishing policies" can in fact be the right policies.

How exactly we shape those policies is crucial to addressing concerns about the outliers and is the greater challenge in all of this--if history is a useful guide.


Bruce Webb said...

Well my lengthy comment just got gobbled and I won't try to replicate it.

First the notion that the number of working people who were already minimizing their driving is "actually quite small" could use some empirical support and the idea that these are exceptions that can be handled with relatively small offsets could use some as well. This is a feature and not a bug of that range of policy proposals that range from flat taxes to fair taxes to consumption taxes, by the time you offset the "outliers" you end up with results that are disadvantageous to the broad middle range of taxpayers. The idea that we should just jump on board a policy proposal first and worry and details and actual incidence later generally turns out to be a losers' game for the majority.

Second I think you should take a hard look at the concept of where honest disagreement transforms into "poisoning the well". You presented an argument wholly rooted in theory, I put for some challenges derived from praxis, and somebody got a little defensive. There is an ongoing rather spirited dispute between what have been called the orthodox and the heterodox wings of economic thought, the argument 'That is not what they taught me at the University of Chicago GSB' doesn't necessarily have the force it used to. Welcome to the Club.

Stevelle said...

[things I claimed] "could use some support."

You are absolutely right. The mean monthly cost of car ownership is about $700, and we start with the 30% of folks who are in fact already within metros, checking rents along the eastern and western sea boards $700 can buy a bit of freedom in. Looking at the suburbs, that money goes further. Sadly, I don't have much better data at hand (I'm at work today, and I'm still not an economists or working at a university).

"The idea that we should just jump on board a policy proposal first and worry and details and actual incidence later generally turns out to be a losers' game for the majority."

I couldn't agree more. I said:

"How exactly we shape those policies is [...] the greater challenge in all of this"

The details matter immensely. Before such a gas tax could fairly be put into place, a lot of other things would have to change. Such as health care and income taxes... both topics you brought up.

That doesn't mean, however, that there isn't value to the idea, and using it to identify other critical policy improvements we could make on the way.

At least, I would like to pretend from time to time that policy was actually formed so carefully.

richard said...

"Mandated higher fuel efficiency standards have one main consequence: the cost of cars should increase."

This sounds very logical, but is it true?

Currently, more fuel efficient cars are significantly cheaper than the average pickup / SUV.

It's not so clear to me.

tony said...

Regarding the last comment by Richard: making a SUV fuel efficient would make it much more costly. SUVs are currently great money makers for the Big Three because they do not have to adhere to CAFE, if I am not mistaken.